Did investors wary of an Obama presidency help send the stock market on a plummet in the latter half of 2008? Perhaps. Just how much of a factor our now president-elect was is probably impossible to determine. But no matter what you think of his politics, the upcoming situation in Washington does suggest a few sectors in which to focus investments. Let’s look at a couple, the first more controversial than the second.
As a result of increased consumer saving, decreased bank lending, and other factors, we are currently experiencing falling prices in many commodities. But this trend will eventually be reversed. The federal government has already pledged an enormous amount of money for bailouts. The first year of the Obama presidency will almost certainly see the first ever federal budget deficit in excess of $1 trillion. All of this money must be either borrowed, or simply created, and there are signs that China, one of our biggest purchasers of US government debt, may be thinking of calling it quits. It is therefore quite likely that we will see a substantial inflation of the money supply, followed soon by increasing prices as too many new dollars chase too few goods.
How should the investor who foresees this future act? One thing he could do is invest in commodities whose price will rise concurrently with the economy-wide inflation. The traditional choice for this purpose is gold. Gold can be purchased in a hundred different ways, and is available on the market via streetTRACKS Gold Trust, ticker symbol GLD. The shares of gold mining companies can also be attractive. They often pay a dividend, and can magnify any changes in the price of gold, since a small percentage increase in such price can translate to a much bigger percentage increase in the miner profits. One large, and geographically diversified such company is Newmont Mining (NEM), which currently sports a dividend yields of 1.00%.
The less controversial investing strategy orients itself around the pledges made by the upcoming government. One area Obama emphasized during his campaign was clean energy, including the desire to create 5 million “green” jobs, and a pledge that America will get 10% of its energy from renewable sources by the end of his first term. The German company Siemens (SI), manufacturer of several models of wind turbines as well as steam turbines that could find use in a solar power plant, might benefit from such plans. But Siemens is also a huge company, involved in all sorts of industries. They therefore represent a conservative play in terms of both potential gain and loss – they would benefit from a green energy push, but they would not collapse if energy sources became less important, say in an extended recession. They do currently have a dividend yield of 2.1%.
A more direct play would be a company like First Solar (FSLR), a manufacturer of thin-film solar cells. The company obviously has the potential to benefit from an increased investment in clean energy, but beware. Many investors fear the stock price is a bubble that has yet to burst, and worry about the desirability of the firm’s products should much cheaper oil prices persist.